(Reuters) - Bank of America Corp, the No.2 U.S. bank, reported a stronger-than-expected quarterly profit, driven by a steep fall in mortgage losses and provisions to cover bad loans.

Fourth-quarter net income applicable to shareholders rose to $3.18 billion, or 29 cents per share, from $367 million, or 3 cents per share, in the same quarter of 2012 when profit was dented by about $5 billion of mortgage-related charges.

Analysts had expected earnings of 26 cents per share, according to Thomson Reuters I/B/E/S.

"Capital and liquidity are at record levels, credit losses are at historic lows, our cost savings initiatives are on track and yielding significant savings, and our businesses are seeing good momentum," Chief Financial Officer Bruce Thompson said.

Provisions for credit losses fell to $336 million from $2.2 billion in the fourth quarter of 2012.The bank's consumer mortgage business lost $1.1 billion, compared with a loss of $3.7 billion a year earlier.

The mortgage losses stem are mainly a legacy of the housing crisis and the bank's disastrous 2008 purchase of Countrywide Financial.

Bank of America's shares, which rose 34.6 percent in 2013, were up 2.3 percent at $17.16 before the bell on Wednesday.

Chief Executive Brian Moynihan has focused on cutting costs since he took the top job at the bank in 2010 and announced plans in 2011 to save the bank $8 billion per year.

Bank of America released $1.2 billion from its reserves to cover bad loans, compared with $900 million in the same period a year earlier and $1.4 billion in the third quarter.

The bank's net charge-off ratio fell to 0.68 percent from 1.40 percent in the fourth quarter of 2012 and 0.73 percent in the third quarter.

Firmwide investment banking fees increased 9 percent to $1.7 billion as companies around the world took advantage of record high stock prices to raise equity capital.

Total issues rose 50 percent in quarter from the same period a year earlier, making it the strongest quarter for equity capital raising since the fourth quarter of 2010, according to Thomson Reuters data.

Equity trading revenue rose 27 percent to $904 million from a year earlier.

Bond trading revenue rose 16 percent to $2.1 billion as stronger results in credit and mortgage products more than offset weakness in rates and commodities, Bank of America said.

WEALTH BUSINESS THRIVES

Bank of America's global wealth and investment management business reported record net income and asset management fees.

Net income rose 35 percent to $777 million, while revenue increased 7 percent to $4.5 billion, driven by higher noninterest income related to long-term flows of assets under management and strong markets.

However, the end of the mortgage refinancing boom hit Bank of America's consumer real estate services business.

The Charlotte, North Carolina bank made $13.5 billion in home loans, down from the $22.6 billion in the third quarter and $21.5 billion in the year-earlier quarter. Core production revenue more than halved to $403 million.

Bank of America's net interest margin, a measure of the profitability of its loans, rose to 2.46 percent, up from 2.35 a year earlier and 2.44 in the third quarter.

Litigation expenses rose to $2.3 billion from $1.1 billion in the third quarter and $2.0 billion a year earlier.

The bank has already agreed to pay in excess of $45 billion to settle disputes stemming from the 2008 financial crisis.

(Reporting by Anil D'Silva in Bangalore and Peter Rudegeair in New York; Editing by Ted Kerr)

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